Did you miss this article the first time? From time to time we like to open the vault and re-release relevant posts. This post originally appeared in July and remains relevant as we head into the new year.

The mutual fund industry is changing, and fast.


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How can smaller mutual funds best thrive amidst the turbulence identified in Barron’s article “The Future of Mutual Funds”? Our take: Don’t panic. Big funds may be scrambling, but there is still plenty of room for smaller, differentiated funds to flourish.

Trend 1: Large shift from active to passive management

Advice for smaller funds:

Many mutual fund giants like Vanguard are shifting from active to passive management, but the Barron’s article notes that active management is a place “where smaller firms can shine”—and SunStar Strategic agrees. Smaller funds typically have fewer resources than large ones, so they have to work to carve out a piece of the so-called investing pie. Differentiating themselves as active managers can be one key to making this happen.

Niche players have the best chance to stand out in the crowd—if they tell their story well. Smaller funds often separate themselves from the pack by performing greater hands-on due diligence to intimately know the companies they select for their portfolios. Investing is a business of uncertainty, but this intimate knowledge is the best form of risk management and should help shareholders rest easy.

Trend 2: Shift in the industry toward lower costs and high performance

Advice for smaller funds:

Keep costs down by strategically capitalizing on the advantages of being a small fund, like the ability to move in and out of stock positions easily. How? Simply—by actively benefitting from investment opportunities that larger funds, because of the size of their positions, are unable to reach consensus on.

Of course, all funds focus on fulfilling the performance expectations of their shareholders. As the market oscillates up and down, shareholders will trust and respect the fund if it performs as they have anticipated.

Trend 3: New DOL ruling

Advice for smaller funds:

In light of the new Department of Labor ruling, which “will require advisors to act as fiduciaries when choosing funds for retirement accounts,” smaller funds should make a continued effort to be transparent. Shareholders need to understand the products offered and be aware of hidden costs and legal fees.

If a smaller fund is not already transparent, it’s time to get on board. Transparency helps alleviate confusion and avoid outflows, and investors appreciate honesty and clarity. Educated shareholders will be more loyal to funds that operate with these principles in mind.

Trend 4: Increasing role of technology in the mutual fund industry

Advice for smaller funds:

Smaller funds may worry about how to compete with robo-advisors and other large-scale technological platforms that are outside the reach in terms of their available resources. Robo-advisors and small, actively managed funds provide very different services. There are always going to be people who still want high quality stock pickers, so as long as smaller funds continue to do what they do best, there will be space in the industry for them to prosper.

SunStar Strategic suggests looking for opportunities to stay innovative on a smaller scale.

Make your Fund Stand Out from the Crowd